BOJ Beat: Officials Welcome Yellen’s Defense of BOJ Policy

Bank of Japan officials must be breathing a sigh of relief after the new head of the U.S. Federal Reserve gave her backing to the BOJ’s aggressive monetary easing, refuting charges that it was purposely trying to weaken the yen for the benefit of Japanese exporters.

“This is a topic that the G-7 has considered and generally come to the conclusion, one that I agree with, is that countries should be allowed to pursue monetary policy to consider domestic aims,” Ms. Yellen said in response to a question by Rep. Gary Peters, a Democrat from Michigan.

Japan has had 20 years of “mild but chronic and debilitating deflation,” so it’s natural that Japan would want policies to end that. A stronger Japanese economy would benefit its neighbors and the global economy, she added.
People familiar with the BOJ’s thinking said Ms. Yellen’s remarks came as no surprise to the central bank. They added that BOJ officials were even confident that the weak yen won’t be a topic for discussion when central bank chiefs and finance ministers from the Group of 20 nations gather in Sydney later this month.

“Given that Tokyo is now running a huge trade deficit, a weak yen won’t be regarded as a problem,” said one person with knowledge of the BOJ’s views.

Japan posted a ¥11.475 trillion trade deficit in 2013, the largest ever under the current statistical format dating back to 1979. Economists blamed the huge deficit on a surge in imported bills for fossil fuels amid a continued shutdown in nuclear power plants and a shift in production offshore by Japanese firms.

This, despite a sharp 18% weakening of the yen, is a worrisome sign for Japanese policy makers as it indicates that companies are paying more bills overseas than they earn abroad. But that’s a boon for overseas countries seeking to ramp up exports to Japan, where consumption has gone up ahead of an upcoming sales tax increase in April.

“Conditions are now different,” said Junko Nishioka, chief economist at RBS Securities Japan and a former BOJ official. “Peer pressure over a weaker yen is diminishing.”

Japan and China used to be blamed for their huge trade surpluses compared with the size of the economy. But such criticism is now directed at Germany, whose surplus-to-GDP ratio has stayed around 6.0%.

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